It is hard to see how Keir Starmer could have had a worse local election campaign. The Labour Party lost hundreds of local councillors, many of them in its core heartlands in the north of England and Wales, and it was pushed down to third place in the total votes cast. One way or another, it is likely to get wiped out at the next general election.
It remains to be seen what happens to prime minister Keir Starmer and his embattled chancellor Rachel Reeves. Their fate will be decided over the next few days or weeks. Either they will just about stagger on, leading a demoralised party that can't decide who should replace them, or they will be ousted in favour of someone else – presumably Andy Burnham, who will have no mandate to govern. We will find out soon enough. But one point is clear: after the issue is decided, the UK will be stuck with a lame-duck government.
That will lead to three big problems. First, the endless speculation about a change of leader and all the political uncertainty around that will drive bond yields relentlessly upwards. The yield on ten-year gilts, the benchmark for the cost of government debt, has already punched its way through the 5% mark, and with each crisis nudges a little higher. The 30-year yield has risen to its highest level in almost three decades and above countries such as France and Italy, even though their long-term fiscal outlook is even worse. That matters. The country has an outstanding national debt of £2.9 trillion, and it is climbing by more than £100 billion every year.
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The annual interest payments on all that have climbed to £110 billion and as older debt issued when rates were close to zero has to be replaced, they will keep on climbing. If they go much higher, the government will find itself forced to raise taxes, not to spend more on public services, or invest in infrastructure, but just to service its debts. It is hard to see how that will be popular with voters or the party's backbenchers.
Keir Starmer's government will drift from crisis to crisis
Second, tough decisions will be endlessly delayed. Sooner or later, a British government is going to have to make some harsh choices on public spending. The triple lock on pensions will have to be abandoned; the welfare bill will have to be reduced by reducing entitlements and making it harder to claim for mental-health conditions, and the dire productivity of the public sector will have to be improved. Those decisions can be postponed, but they can't be avoided forever. Starmer and Reeves, however, will not have the political support to make any significant reforms, even if they wanted to. Instead, the government will drift from crisis to crisis, hoping to survive until the end of the week.
Finally, Keir Starmer will have to keep on making concessions to the left. The backbenchers, trade unions and party activists who will decide his fate, or who will choose a new leader if there is a contest, want even higher state spending, more taxes on companies and the “rich”, more rights for workers, along with fewer for landlords and shareholders, and a lot more state intervention in the economy. All of that will damage businesses' confidence.
But even if there is a change of PM, it won't make much difference. As we learned with the constant changes of leader during the last Conservative government, anyone who comes into power without a clear mandate from the voters is inevitably very weak; they don't have any real authority. Gilt yields will still go up sharply, tough decisions will be postponed, and the left of the party and the trade unions will still have to be kept quiet with higher spending. Anyone expecting a fresh start under a different prime minister, presumably with a fresh chancellor alongside them, will quickly be disappointed. There will be no changes of any substance.
Add it all up, and one point is clear. The British economy is now condemned to at least another two or three years of stagnation. At best, the economy will limp along, with 1% or less growth, depending on what happens in the rest of the world. We can give up on any hopes of a sustained recovery – that will now have to wait until after the next election.
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